Banks Find Ways to Make Up for Weak Corporate Loan Demand

Corporate customers may not be borrowing much, but that doesn't mean they aren't banking.

Be it the pickup in merger advisory fees paid to PNC Financial Services Group Inc., the increased foreign-exchange volumes reported by Fifth Third Bancorp or the improved syndicated loan pricing obtained by U.S. Bancorp, some regional banks are finding ways to offset the continuing weakness in commercial loan demand.

As a result, at a time when the industry is struggling to get basic businesses back on a growth track, corporate banking is emerging as a bright spot.

Much of the momentum has been driven by the competitive changes brought about by the financial crisis. Regional banks with trading businesses and capital to lend are sitting in a sweet spot. Clients that trade through the largest banks are continuing their efforts to spread around their counterparty risks. Meanwhile, in the syndicated loan market, many of the collateralized loan obligation managers that dominated deals before the crisis are no longer around now that the borrowers need to refinance.

Banks also are benefitting from improvements, however incremental, in the credit markets and the broader economy, with merger activity and capital raising efforts coming back to life for middle-market companies.

The trends are emboldening some banks to get more aggressive in going after corporate customers.

"While loan demand remains tepid, we're focused on our goal of adding 1,000 new customers in our corporate bank this year," PNC Chairman and Chief Executive James Rohr said Thursday on a conference call with analysts. At that rate, new client growth for PNC and the former National City Corp., which PNC acquired in late 2008 and finished integrating last month, will have doubled, he said.

If the Pittsburgh company succeeds in its goal, it will not be just because of broad trends. PNC doubled in size with the National City purchase, and has made quick work of bringing its cross-selling skills to National City's corporate clientele.

"We're a larger company now and in more markets," Bill Demchak, the senior vice chairman who runs corporate and institutional banking for PNC, said in an interview. "That, combined with the fact that many of our competitors are gone outright or weakened, [means that] in effect we're getting more shots on goal."

PNC's corporate and institutional bank, which typically targets customers with annual sales of $30 million to $2 billion, earned $443 million in the second quarter, up from $360 million in the first quarter and $107 million in the second quarter of 2009, on a strong increase in deposits and a sharp drop in the provision for corporate credit losses. The results helped the Pittsburgh company boost its net income to $803 million, or $1.47 a share, almost quadruple the earnings posted in last year's second quarter.

At Fifth Third, corporate banking revenue was little changed from the year-ago period as lower fees on letters of credit offset growth in institutional sales. But versus the first quarter, revenue was 14% higher at $93 million, driven by strong syndication and foreign-exchange activity.

Fifth Third shares ended the day nearly 10% higher as the company reported its first profit in four quarters and said it expected credit trends to keep improving. The company's prospects for corporate banking growth may not have played much of a role in Wall Street's enthusiasm — CEO Kevin Kabat downplayed the increase in corporate banking revenue, warning that "we're not likely to match that level of revenue in the third quarter, which is typically seasonally soft" — but the results still spoke to the idea that banks are finding ways around the problem of weak loan demand.

At U.S. Bancorp, credit line utilization by corporate clients is as low as it's ever been — falling to a 19% rate in the second quarter. But the company suspects it is hanging onto at least some of the financing demand that is being redirected to the capital markets, thanks to the debt deals it is arranging through its recently expanded investment-grade bond desk.

And some banks are actually bucking the trend and increasing their corporate lending books.

"We're really benefitting [from] a major investment we've made in corporate, middle-market banking," BB&T Corp. Chief Credit Officer Clarke Starnes said Thursday. "We have a number of new bankers aligned with our industry vertical teams, and they're producing excellent results right now. Our corporate book was up 12.6% for the quarter. And production from these corporate teams was actually up 60% for the quarter, so we're taking full advantage of that, and we think that will help us in the future."

A more widespread factor in industry results has been the pickup in syndicated loans. According to Bloomberg LP data, U.S. syndicated loan borrowings in the first half of the year more than doubled from the first half of 2009 to $438.2 billion, with 124 underwriters on 882 issues, versus 95 underwriters a year earlier on 428 issues.

"It's high percentages up from a next-to-nothing amount, but it is fairly healthy right now," Demchak said. "As CLOs have gone by the wayside, banks have gotten back into the game because the deals are structured better, and they pay a higher spread."

But Demchak warned that corporate banking is not for everyone. "A lot of banks, particularly the smaller regionals, want to grow corporate banking because they know they need to shrink real estate," he said. "But if they don't have the product set to have a full relationship with the client, well, just lending money on its own is a weaker return than lending money, running treasury management, [managing] 401K programs" and the like.